Establishing a foothold in the Indian market presents foreign entities with several options, including the establishment of a Liaison Office (LO) or Branch Office (BO), or incorporation of a Wholly Owned Subsidiary (WOS) company. Each avenue offers distinct features and considerations, tailored to the specific needs and objectives of the foreign entity.

Incorporation of a WOS Company: For many non-resident Indian entities, incorporating a WOS company is a common and preferred method of entry into the Indian market. This approach grants the WOS company the status of an Indian entity, subjecting it to the same compliance requirements as domestic companies. Such compliance includes adherence to taxation laws, corporate governance norms, and other regulatory frameworks applicable to Indian companies. By establishing a WOS, foreign entities gain full control over their operations and decision-making processes, enabling seamless integration into the Indian business landscape.

Establishment of LO/BO: Alternatively, foreign entities may opt to set up a Liaison Office (LO) or Branch Office (BO) to initiate business activities in India without forming a separate legal entity. Under this arrangement, the foreign entity retains its identity, subject to approval from the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) 1999. Upon obtaining RBI approval, the entity must register as a Foreign Company under the Companies Act, 2013. While LOs are not permitted to earn income and are thus exempt from income tax, BOs are taxed at a rate of 40%. BOs can engage in a variety of activities such as import/export, provision of professional services, research, and acting as representatives of the parent company.

Approval Process for LO/BO Establishment: To establish a LO/BO, foreign entities must submit an application in Form FNC to an Authorized Dealer (AD) Bank for approval from the RBI. The approval process operates under two distinct routes:

1. Automatic Route: This route applies to foreign entities whose primary business activities fall within sectors permitting 100% Foreign Direct Investment (FDI) under the automatic route. Applications for establishing BOs/LOs in these sectors are processed through AD Category-I Banks without the need for additional approvals.

2. Government Route: Foreign entities engaged in sectors where FDI is restricted under the automatic route or classified as Non-Governmental Organizations (NGOs) must seek approval through the Government Route. Such applications are reviewed by the RBI in consultation with the Ministry of Finance, Government of India.

Permitted Activities: LOs primarily serve as representatives of the parent/group companies in India, facilitating communication and promoting collaborations. Meanwhile, BOs are authorized to engage in a broader range of activities including import/export, provision of professional services, research, and acting as buying/selling agents for the parent company. However, both LOs and BOs are prohibited from undertaking manufacturing activities.

Criteria for Eligibility: BOs must demonstrate a profit-making track record and a minimum net worth of USD 100,000 for the preceding five financial years. Conversely, LOs are required to exhibit a profit-making history and a net worth of USD 50,000 for the preceding three financial years. In cases where entities fail to meet these eligibility criteria, they may still apply with a Letter of Comfort from their parent/group company.

Compliances: LOs/BOs are obligated to submit Annual Activity Certificates (AAC) and audited Balance Sheets to AD Category – I Banks and the Director-General of Income Tax (International Taxation), New Delhi. Upon establishment, these offices are allotted a Unique Identification Number (UIN) by the RBI and are required to obtain a Permanent Account Number (PAN) from Income Tax Authorities.